Filmore Enterprises Foundamental Concepts
1. a. See the attachment (expected rate of return)
b. Based soly on expected returns, investment on CPC appears the best, for it has 9.70% expected returns, yet the investment on MORELY appears the cost, which has only 5.70% expected returns. c. Rate of return is mainly connected with the beta coefficient, which means if the rate of return is relatively higher, then the company will have higher risk. Judging from table1 in the attachment, CPC with higher rate of return(9.70%) has higher beta coefficient(1.53%), which means it might be the most profitable one, but the risk is high, while MORELY has the lowest rate of return(5.70%)with the risk of -0.77% (it’s riskless). As for EAT, the rate of return is a little lower than CPC, but still very high, so it might also has high risk.
2. a. T-bill return is independent of the state of economy. According to the attachment, we can see that the figures of economy of T-bill are all the same, which means no matter what the state of economy is, it won’t be affected; The beta coefficient is 0 and because of it is independent of the changable economy, T-bill surely promise completely risk-free returns. b. T-bond returns vary because it is not independent of the state of economy, that is to say, it is affected by the market returns; Est.Y=Constant+Coefficient*Market
So, because of the coefficient is a negative value, so when the market returns are low, the T-bond returns high, vice versa. c. The returns on corporate bonds that Filmore Enterprises might issue are all higher than T-bonds, which is 7.70%, 8.90% respectively; my answer would dependent on the potential bond rating of Filmore Enterprises.
3. a. See the attachment
b. It can be clearly seen form the table 1 in the attachment that the risk and expected return of all six assets are proportional to each other, that means the higher the risk, the higher the returns, vice versa; more "efficient...
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